Universal Credit could risk adding to the financial instability of low-income workers, with those who are self-employed likely to come under the most pressure, new research from Citizens Advice finds.

Today the charity has released two new reports on Universal Credit, examining the impact of work allowance cuts on people’s budgets, and why its design can leave self-employed workers at a financial disadvantage.

Citizens Advice analysis shows a self-employed worker who receives Universal Credit could be worse off by £630 a year compared to an employee on the benefit, even if their year-end earnings are identical.

The report highlights issues with the Minimum Income Floor, a rule that assumes everyone claiming Universal Credit who has been self-employed for a year or more is earning the National Minimum Wage (NMW).

If they earn less than the NMW one month, their Universal Credit payment won’t make up the difference. But if their monthly earnings go over the NMW, their benefit payment will be reduced accordingly.

The charity says this design flaw is unfair and risks causing financial hardship as self-employed workers often earn different amounts from one month to the next.

One family helped by Citizens Advice had to visit a food bank as a result of having less money to pay their bills because of the Minimum Income Floor. In order to boost their Universal Credit payment, the father was forced to give up his computing business and stop work altogether, while the mother cut short her maternity leave to return to work.

The second report finds that employees could also be at risk of financial insecurity when they move to Universal Credit. In 2015, the Government announced a series of cuts to the benefit which will result in 2.1m working households receiving less money under Universal Credit compared to the old benefit system.

One of the biggest cuts was to the work allowance, resulting in workers seeing a reduction in the amount of hours they can work before their Universal Credit payment starts to decrease.

Citizens Advice asked 877 people receiving in-work benefits how they would cope with a £100 drop in their monthly income, roughly the average amount affected households stand to lose from the reduced work allowance.

One in four workers (26%) said they would not be able to top up their income through employment even though they might need to, with 1 in 3 (33%) of those saying this is because they work full-time already.

Caring responsibilities (23%) and having a disability (18%) were other reasons workers gave for not being able to make up the £100 shortfall through work.

Universal Credit is currently being rolled out, and the number of claimants is set to double over the next year, increasing by 1.2 million. A final completion date has been set for 2022, at which point an estimated 7.2 million households will be claiming Universal Credit - 3.9 million of them in work.

The charity is calling for the Government to review both the lowered work allowance and the Minimum Income Floor to give workers better financial security and ensure they are incentivised to progress in work.

Gillian Guy, Chief Executive of Citizens Advice, said:

“Despite the labour market changing significantly in the last decade, including a rapid rise in self-employment, Universal Credit is still better suited to those with regular jobs.

“The Government has shown it is prepared to act to improve Universal Credit as new facts come to light - an approach we strongly support.

“It now needs to look again at the design of the benefit to ensure self-employed and agency workers aren’t left at a financial disadvantage.

“It should also reassess the work allowance reductions to ensure workers who can’t increase their income through employment aren’t left struggling to make ends meet, while better incentivising those who can.

“A failure to do this risks undermining two of the core purposes of Universal Credit - to incentivise people to move into and progress in work, and provide low-income families with financial security.”

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Notes to editors

Citizens Advice calculated how much a self-employed worker could lose from the Minimum Income Floor using its own modelling. It took a hypothetical example of an employee and self-employed worker with identical personal circumstances and the same annual income of £9750 to work out the difference in their Universal Credit payments over a whole year: Citizens Advice, Universal Credit and Non-Traditional Employment, 2018, 8

The IFS estimates that 2.1 million working households will get less in benefits when they move to Universal Credit, losing an average £1,600 a year. Working lone parents and two-earner couples are most likely to experience losses: IFS, Green Budget , 2016, 232

Citizens Advice commissioned YouGov to poll 877 people in England and Wales, in receipt of Working Tax Credit, Child Tax Credit or Universal Credit. Polling was carried out online between 25th January and 7th February 2018. The figures have been weighted and are representative of all GB adults (aged 18+).

Transitional protection has been put in place for people who are moved over to Universal Credit automatically from 2019, but it is only projected to help a relatively limited group of households for a temporary period: OBR, Welfare Trends Report - January 2018 , Chart 6.3

The Citizens Advice service comprises a network of local Citizens Advice, all of which are independent charities, the Citizens Advice consumer service and national charity Citizens Advice. Together we help people resolve their money, legal and other problems by providing information and advice and by influencing policymakers. For more see the Citizens Advice website.

The advice provided by the Citizens Advice service is free, independent, confidential and impartial, and available to everyone regardless of race, gender, disability, sexual orientation, religion, age or nationality.

To get advice online or find your local Citizens Advice in England and Wales, visit citizensadvice.org.uk

You can get consumer advice from the Citizens Advice consumer service on 03454 04 05 06 or 03454 04 05 05 for Welsh language speakers.

Local Citizens Advice in England and Wales advised 2.5 million clients on 6.2 million problems in 2014/15. For full service statistics see our publication Advice trends.

Citizens Advice service staff are supported by more than 21,000 trained volunteers, working at over 2,500 service outlets across England and Wales.